BNY Mellon Deposit Fee: Life in the Liquidity Trap

Bank of New York’s move to charge a fee on large deposits is emblematic of much broader strains that plague the U.S. economy and the global financial system.

In response to the recession and anemic recovery, the Federal Reserve has pushed interest rates to zero and purchased $2.6 trillion worth of mortgage and Treasury securities. In the process, it has flooded the financial system with cash. But banks and investors are reluctant to put that cash to work because they are worried about the economic outlook. With no other place to put it, they’re parking it in banks.

Economists call this a liquidity trap — liquid cash is trapped in the financial system and not finding its way into productive investments and spending in part because demand is so weak.